Chronologically Ordered LOCAL POWER News Index Local Power's Legislative Agenda, January 2002 How to Avoid the Coming Natural Gas Scam:

The Next Bailout Will Be for Overdevelopment of Natural Gas-Fired Power Plants

by Paul Fenn

While California's Energy Crisis was largely caused by natural gas price volatility, politicians accepted  the industry's since-discredited fiction that a shortage of power plants was the cause of that volatility. With Governor Gray Davis responding by gutting state environmental regulation to quickly permit a slate of natural gas plants in communities throughout California, and with distributed natural gas microturbines also being promoted in cities throughout California, the future energy security of California is being hung on the same hook that caused its energy crisis in the first place.  Worse, with enough natural gas plants being built to power four Californias since 1999 in the U.S., California may yet again lead the nation in committing the next big energy scandal.

The decision to make California's electricity prices even more vulnerable to natural gas' price volatility was worsened by recent legislation put forward by the man responsible for California's deregulation law. Exposing Californians to yet another round of public bailouts of the energy industry, this time by having the state underwrite new, privately-owned natural gas plants, gas plant developers complained that no private bank would underwrite their new power plants, and convinced State Senator Steve Peace to introduce new legislation allowing the California Power Authority to provide public financing for these plants.

The writing on the wall is clear; if they are successful in getting the money to build the plants and the price of their fuel increases, consumers or taxpayers will be forced to bail them out yet again.

The nation's growing "Energy War" in the Middle East is not the only factor leading observers to predict that natural gas prices will increase and remain volatile for years to come. With domestic supplies and new domestic drilling for gas dwindling, federal regulation of gas plant pollution will drive up prices, with the expected increase in the price of petroleum further increasing the cost of gas-fueled electricity, meaning that California Power Authority financing of gas burning power plants will suffer increased electricity prices and, later, another round of public bailouts. Moreover, with new gas plants claiming transmission rights throughout California, the move to gas will not only threaten more electricity price volatility but block transmission access for the very would-be wind power projects and other large-scale renewable energy projects that are urgently need for a real solution to the state's - and the nation's - energy woes.

The price volatility of gas is legendary; its impact on California's largely natural gas-fueled power plants is infamous. In 2000, spot-market prices quadrupled in less than nine months peaking at $8.72/MMBtu in January, 2001 - at a time when no one in the industry was predicting steep increases. State and federal investigations have found that these increases were key to a market gaming strategy that resulted in a twelve-fold increase in the price of electricity in a matter of weeks in California, virtually causing the "electricity" crisis that followed.

Volatility also includes sudden price drops that have been used for specious claims that gas is a competitively priced fuel and California's gas-intensive policy justified. Less than three months later prices began to plummet - dropping below $2.00/MMBtu even before the September 11th terrorist attacks. The relatively low price of gas since then has led short-sighted politicians to support more construction of gas plants throughout California. If these plants are built and financed by public agencies, expected increases and continued volatility in the price of gas will make the power from these plants volatile and more expensive than expected, resulting in more public bailouts of this industry.

Construction of gas plants continues in Bay Area cities like Milipitas and Pittsburg at the same time that the fuel for those plants has risen suddenly again in recent months. In March of 2002, prices again unexpectedly sky-rocketed for the second time in 18 months - doubling at a time when consumption was at a seasonal low and the amount of natural gas in storage was at record levels. In other words, the price rose with no market-based explanation, just as it did prior to the 2000 price spikes.

While analysts are investigating natural gas' price volatility, studying both supply and demand in the North American market to predict more accurately likely near and mid-term price levels, only one basic fact is clear: natural gas was the driving force behind California's energy crisis,  its price remains volatile, and it is expected to rise in the near, medium  and long terms.  Analysts predict that while it is possible that spot market  prices could take one last short-term dive this Fall, when unused storage capacity may fall to zero, by December or early January the forward  delivery price curve will shift sharply upward. New gas plants will become lemons. Continued construction of gas-fueled plants will be yet another avoidable disaster caused by the short-term thinking of California's political establishment.

Further, analysts predict that this upward shift will not be short-lived;  but rather it will mark the beginning of a period of at least 36-48 months in which prices are likely to be consistently well above current levels. This upward price pressure stems in part from a huge shortfall in supplies available to the U.S. market, which are likely to be at least 1.0 Tcf short of next year's needs even if there is zero increase in demand.

The rash of natural gas plant construction in California, combined with the impact of continued aging U.S. fields, the impact of sharp cutback in drilling that began in September 2001, major reductions occurring in net imports to the U.S., intense upward pressure on the forward delivery price curve and a large impending "Current Account" deficit in 2003 all anticipate increased demand for gas even if the recession continues. Whether by artificial or real shortages, natural gas will lose its mantle of reliability and become yet another public policy disaster for the state and the nation.

Mindless overdevelopment of natural gas plants in recent years is now being completed all over the nation in the same moment that the fuel to fire them is becoming less certain. Hedged as a commodity against the price of petroleum, the long-term future of natural gas is equally dark. At the same time that available supplies are dropping to the lowest in more than a decade, demand is virtually certain to exceed current forecasts-due in part to the impact of 200,000 MW of natural gas-fired power plants that have been built since 1999, as well as tightened federal restrictions on NOx pollution (natural gas is not actually that clean either) that will go into effect in 2003 and 2004.

These sustained much higher-than-expected prices in turn could have far-reaching implications for every sector of the industry, and point to the need to build, instead of natural gas fired plants, large scale renewable energy and conservation facilities - or turn back to terrorist-vulnerable nuclear and climate change/asthma causing coal power, as many analysts are now recommending for a less volatile energy future.

Those who by building new plants invest in the future price of gas will have no excuse when this results in a dramatic increase in the price of electricity. It is critical that both state agencies like the California Power Authority and cities preparing to choose alternative energy providers under the state's new Community Choice law resist the shortsighted turn to natural gas and instead aggressively develop large scale renewable energy facilities. If for the long term energy security of their residents and businesses, lower and more stable rates for businesses, or for the sake of stopping asthma or climate change (electricity being the nation's largest cause of both),  now is the time to build renewable energy facilities on the same scale that bridges and freeways are built. With wind power already cheaper than coal power and solar power already cost-effective if developed on a large scale, California cities can demonstrate that when it comes to energy crisis, energy war and energy pollution, America need not choose between a rock and a hard place.

------------------------------------------------------------- Paul Fenn, who authored the 2002 California Community Choice Law, AB117 (Migden-SF), the original 1997 Massachusetts Community Choice Law, and San Francisco's voter-approved 2001 Solar Bond Authority, Proposition H (Ammiano), can be reached at paulfenn@local.org

Copyright 2002 by Local Power.